Now that Singapore has emerged from the circuit-breaker period and business activity is gradually picking up, commercial real estate investors have begun updating their strategies in a world where Covid-19 has altered the ways people live and work.
Mingtiandi sat down with Michael Tay, CBRE’s head of capital markets for Singapore, to better understand the factors behind the resilience of the property market in Southeast Asia’s wealthiest city.
Tay, who has been helping to meet the real estate requirements of corporate tenants in the city for two decades, last year took on the added responsibility for the CBRE Capital Markets business in Singapore. He shares his insights on what lies ahead for commercial-property investors in Singapore.
Mingtiandi: What are some characteristics of Singapore and its property market that make it so attractive to longer term investors?
Michael Tay: Singapore has a reputation as a stable property market with a strong track record for mid- to long-term capital value growth and preservation. CBRE has been present in the city since 1958. Through this period, Singapore has established itself as an attractive investment destination due to key attributes such as stable government, a transparent legal governance environment, mature financial system and its growth into a global city. In the current environment, such attributes are even more important to investors as they seek safe returns in an increasingly volatile market.
Mingtiandi: What should investors expect from Singapore’s real estate market for the rest of 2020 and beyond?
Michael Tay: While the Covid-19 situation has had an adverse impact on many industries, we are fortunate that in Singapore, the government has a comprehensive plan to support the economy and shore up businesses. The four supplementary budgets are aimed at helping to transform businesses, retrain local employees, retain jobs and support households. Rebates have also been given out for tenants. All these measures are directly and indirectly supporting the economy which in turn, will have positive impacts on the real estate market.
We should also realise that this public health situation is coming at a time when investor interest in Singapore is already very high. The Economic Development Board’s annual year-in-review for 2019 reported that Singapore attracted S$15.2 billion in fixed asset investment last year, more than 50 percent above the forecast range. And in the first four months of 2020, Singapore secured S$13 billion in investment commitments, exceeding the full-year projection of S$8-10 billion. These reflect sustained investor interest in the Singapore market, and so even if growth drops significantly thereafter, it is still considered robust.
Nonetheless, investment activities in 2020 are likely to be slower in relation to 2018 and 2019. There are two key reasons for this. Firstly, investors are taking a longer time to make decisions due to the pandemic. Secondly, the restriction on international travellers entering Singapore through these months has been a challenge to foreign investors, in particular those with little or no presence in Singapore.
However, fund raising activities have remained strong in the first half of 2020 and with interest rates expected to remain low, real estate transaction volume in Singapore is likely to pick up as we move towards 2021, and we are still seing resilient interest from international investors.
Investors remain interested in office, industrial and logistics assets which are the asset classes that are showing the most resilience in the current environment. Interestingly, there are also investors who are taking alternative views on the hospitality and retail sectors (in particular suburban retail malls). This is a vindication of long-term confidence in these sectors which are currently most impacted.
Mingtiandi: Looking beyond the pandemic, what are some buying opportunities in Singapore that investors should watch out for?
Michael Tay: We expect office and logistics properties to be particularly favoured by both local and international investors. There have been industry-wide debates on the long-term impact on office demand from the advent of a “working from home” culture. It is too early to have a conclusion on the full impact of this trend, but some key fundamentals of the Singapore market and workforce makes us confident that the market will find a balance for office space to remain relevant in the mid- to long-term.
As an example, the competition for talent is high in Singapore and one of the reasons corporates create large, attractive campus here is to build corporate identity and belonging as they seek to attract and retain such talents. Thus, investment in office remains a sector of choice due to its strong leasing fundamentals and demand from the tech sector. Industrial real estate attracts those looking for higher but still steady yields. CBRE has facilitated some S$31.2 billion in commercial property transactions since January 2019.
Mingtiandi: International fund managers such as Angelo Gordon and AEW made major acquisitions in Singapore last year. Can we expect more global asset managers to target the city in the next year?
Michael Tay: In 2019, the proportion of foreign capital driving acquisitions in Singapore increased 6.2 percentage points to account for over 30 percent of all purchases.
The growing involvement of foreign investors in Singapore’s property market testifies to the city’s status as an investment hub – and one that we can expect to grow in importance when things approach the normalcy we were used to before the pandemic. The Covid-19 outbreak, coupled with global political tensions, may curtail short-term investment activities in Singapore as investors weigh opportunities in equities, fixed income and real estate. However, Singapore’s macroeconomic stability and favourable environment for mid- to long-term capital value appreciation will place it in a strong position to attract international capital. In particular, we believe the stability of the city’s real estate market and quality of assets will appeal to investors as they consider their allocation of funds across different instruments.
Mingtiandi: With many local investors in Singapore preferring to hold their commercial assets for the long term, does this present challenges for investors hoping to acquire prime commercial properties? Are there alternative asset classes in the city that investors may want to look into?
Michael Tay: Prime commercial assets in Singapore are tightly held by local investors and developers who typically take long terms views on these investments. Thus, they may not be readily traded. However, with the Government’s schemes such as the Singapore’s Central Business District Incentive Scheme (launched in 2019), investors may have unconventional opportunities to co-invest/develop old buildings that qualify under the Scheme. Under this urban renewal programme, the government has instituted plot-ratio bonuses for redeveloping commercial properties as mixed-use developments. There is also the Strategic Development Incentive Scheme, which encourages the consolidation of smaller buildings into larger projects.
It should also be noted that the percentage of properties in Singapore held by institutional owners has increased over the last 10 years so there will be opportunities for new investors to acquire prime commercial assets from these owners, who tend to be more open in trading of assets.
Another trend we have noticed is increasing investor interest in strata title offices and commercial shophouses. Though the volume of shophouse transactions declined last year, the overall level of trades and the valuations achieved for commercial shophouses have remained robust as they can be refurbished and are exempt from stamp duties. The limited supply of these properties and their suitability for office, food and beverage, and hotel use has driven strong potential for mid to long-term capital appreciation.
In 2019, CBRE was among the leaders in this segment, brokering more than six major strata title or shophouse deals covering more than 65,000 square feet. In fact, since 19 June when Singapore started the second phase of its reopening, CBRE has launched several assets for sale – including shophouses at 223-227 Geylang Road and 4, 6 and 8 Belilios Lane, as well as strata offices in the GB Building (143 Cecil Street) and Samsung Hub (3 Church Street).
At a global level, we have seen increasing interest in value-add opportunities and emerging market sectors, including data centres. We have an international Capital Markets colleague based in Singapore who works with investors for these opportunities globally.
Mingtiandi: Speaking of commercial shophouses, Aberdeen Standard recently entered the Singapore property market by acquiring a row of conservation shophouses. Are we likely to see other international institutions follow similar strategies?
Michael Tay: Conservation shophouses are uniquely Singaporean and typically appeal to investors looking for wealth preservation. This is especially so in the current environment, where there is a lack of available stock for large office trades. Supply of these properties is usually tight and the segment has a positive track record for capital appreciation, making them a good hedge against inflation.
Strata offices and commercial shophouses are an increasingly attractive investment option for both institutional and private investors. These asset classes have demonstrated their ability to appreciate in capital value through market cycles and this has given institutional investors confidence to enter this segment of the market.
Mingtiandi: What makes CBRE a good partner for property investors?
Michael Tay: We have an extensive global network to leverage. The depth and expertise of CBRE’s team has allowed us to help buyers find properties that are not openly available on the market, while also assisting asset holders in arranging profitable exits. Our close relationships with investors worldwide also help to drive our transactions in Singapore.
Earlier this year, our team brokered the sale of the 11th storey of Samsung Hub in Singapore’s central business district, a deal which achieved the highest price for a strata floor sold in the city over the past five years. CBRE also brokered Singapore’s first major logistics transaction for this year – the sale of a warehouse that will serve as the APAC headquarters for a logistics company.
CBRE’s business covers the full spectrum of real estate needs, allowing us to provide end-to-end support for our clients – from market research and advisory services, to sale and lease transactions, property management and project financing. For instance, we have an eight-person capital markets team focused solely on the Singapore market, covering strata title assets as well as specialty sectors such as warehouses and commercial shophouses.
Our Head of APAC Capital Markets, Greg Hyland, is also based in Singapore. He leads a team of experts based within and also outside the region, ready to assist with complex transactions. In 2019, for the ninth consecutive year, CBRE brokered the largest volume of deals globally of any investment brokerage, according to Real Capital Analytics.
Mingtiandi: Singapore has become a preferred regional headquarters location for some of the world’s largest tech corporations. What impact has this had on the market for office assets?
Michael Tay: Singapore’s solid infrastructure and economic fundamentals have made it the ideal location for some of the world’s largest technology companies to set up their regional headquarters. In addition, Singapore’s world class legal system, coupled with government initiatives to transform the city into an intellectual property and innovation hub, complement an active venture capital market that has supported the growth of several homegrown unicorns.
In 2019, the technology sector was one of the biggest players when it came to leasing demand in Singapore. This extended beyond large technology corporations, with an increasing number of small to mid-sized technology companies contributing to leasing activity.
The technology sector is expected to continue as one of the main drivers of office demand for the rest of 2020. Besides large technology firms, which have grown exponentially in the last five years, some of the newer entrants in the Singapore market are expected to lead the next phase of growth.
The impact of the technology sector will be profound. Singapore has traditionally been positioned as a financial city so the growth of the technology sector has made the economy more diversified. The technology firms have become a key demand driver for office space and they are also occupiers of quality office space. The emergence of this sector as a key demand driver will further enhance investors’ confidence in the office market. This diversity of demand is especially important to investors who are looking at diversification of risks in their investment.
Mingtiandi: What are some of the challenges which Singapore may face going forward? What are the opportunities that could arise as well?
Michael Tay: In light of geopolitical risks and global economic growth challenges, we expect some investors to adopt a more cautious approach this year, which has been slowing transaction volumes during the first quarter. However, this also creates buying opportunities for investors with a long-term view.
Another potential challenge is the shrinking universe of investible assets in Singapore, which may lead to fewer transactions crossing the billion-dollar mark, but this will also continue to drive interest in niche asset classes such as shophouses and in value-add opportunities.
Based on our experience, owners in Singapore tend to be well-capitalised. and the low interest rate environment will help to enhance asset owners’ ability to ride through this period. The savings from reduced interest costs may be substantial and improve cash-flow positions, thereby boosting owners’ holding power.
We are thus taking the current view that the possibility of a widespread sell-down is low even as there is likely to be a short-term impact on transaction volumes. However, the current market may present opportunities for marginal discounts from pre-Covid levels. Investors may also get opportunities to acquire assets that may not in the market under normalised conditions. In conclusion, there is a real opportunity to leverage on the current situation to acquire quality assets with view that this market could be poised for a surge in activity once the public health situation improves or when the market demonstrates its resilience in spite of the health concern.
This sponsored feature is contributed by CBRE.